Global Economics

Berlin Planning Second Round of Stimulus

A new package worth 30 billion euros, to be unveiled in January, will contain a "mix of different measures"

The German government is working on a second stimulus package worth "at least" €30 billion, but no decision will be taken until the end of January, when US president-elect Barack Obama is sworn in.

Economy minister Michael Glos discussed a second package during a seven-hour meeting on Sunday between cabinet members and around 30 representatives of industry, trade unions and banks.

Chancellor Angela Merkel, for a long time under fire for not having responded swiftly enough to the financial crisis, pledged to oversee stronger collaboration between all actors involved. Germany was a "strong country" and these measures would help it to weather the storm, she said.

Two working groups, one on labour markets and the other on financial markets, would be immediately formed, finance minister Peer Steinbruck has said.

However, no decision would be taken before 20 January, when US president Barack Obama takes office. "When the US government puts something on the table, the German government will also have something ready," Bert Rurup, head of the economic mediation council within the German government said after the Sunday meeting.

Berlin would also maintain its line on not cutting VAT rates, as the UK has done recently, but would take "its own measures," Mr Steinbruck said.

According to a draft seen by the Wirtschafts Woche weekly, the second stimulus package would be a "mix of different measures" worth "at least €30 billion."

Its main aim will be to break the vicious cycle of inflation and pay raises. Another measure will be to lower the medical insurance contributions by beefing up the health care fund. A second infrastructure programme, as well as tax cuts for the socially disadvantaged have also been included in the draft.

The package would be mostly funded by external loans.

Meanwhile, Berlin has to failed to revive the inter-bank lending market and might soon be forced to modify its €500 billion bank rescue package, adopted in October.

Politicians led by Ms Merkel and Mr Steinbruck have lambasted the banks for parking their cash with the European Central Bank at very low interest rates instead of lending it to each other or to companies.

Speaking to Der Spiegel, American Nobel economics laureate Paul Krugman has accused both Chancellor Merkel and her finance minister, Mr Steinbruck, of still viewing the world as it was a year or two ago, when inflation and deficits were the main economic threats.

Trichet warns on fiscal indiscipline

Meanwhile, fiscal indiscipline in European rescue packages is not to be tolerated, as it could threaten the fragile economic confidence, president of the European Central Bank, Jean-Claude Trichet has told the Financial Times.

But he argued that the European Union's "stability and growth pact", which sets rules on public deficits and debt, offers flexibility to countries with stronger finances. "We would destroy confidence if we blew up the stability and growth pact," he said.

Mr Trichet said the global financial crisis poses a serious threat to industrialised economies. "We cannot afford in the future to put the concept of the market economy at risk as we did."